MASTERPLAST: INITIATING COVERAGE 15 …...2017/12/15 · 15 DECEMBER 2017 Source: Masterplast, MKB MAIN MARKETS Currently the sales of Masterplast products are closely linked to real

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MASTERPLAST: INITIATING COVERAGE

15 DECEMBER 2017

Company data:

Recommendation: Buy

Target price: HUF 775

Price: HUF 579 (14 Dec 2017)

52 week range: HUF 488 - 718

Market cap (HUF, m): 7,957

Average daily turnover (number

of shares): 9,110

Code:

Bloomberg: MASTERPL HB

Reuters: MAST.BU

SUMMARY

Masterplast Group is one of the leading business

service providers focusing on insulation materials

and solutions in the Central and Eastern European

region. The cornerstones of the business strategy are

strong control over production and reliable supply

secured for more than 1000 trading partners mostly

by the company’s own logistic fleet. The product

slate ranges from low-price/low-quality leisure time

products to high-end materials targeting small and

medium-sized building material traders.

KEY THEMES

Masterplast is involved in the supply chain of

Hungarian and regional construction activities,

therefore the Group’s operation are linked to the

general industry developments. These allow the

Group to profit from the recent upturn in the

industry. In addition, the recent product upgrades will enable the company to shift-off

from the construction sector and increase its footprint in the packaging sector as a way of

diversification. Furthermore, due its Serbian exposure the Group has a favorable structure,

which might enable them to profit from the on-going and upcoming transfers of EU funds

from the Structural budget.

VALUATION

Our DCF model assumes a HUF 720 as the fair value for Masterplast shares and a HUF 775

as the 1-year target price.

BASIC FINANCIAL FIGURES

Source: Masterplast, MKB

SELECTED FINANCIAL METRICS AND RATIOS

EUR / for the year of 2011 2012 2013 2014 2015 2016

Sales 82 173 069 85 234 259 81 322 000 81 605 000 83 773 139 80 162 711

EBITDA 5 420 564 2 265 542 4 232 000 5 038 000 5 117 064 4 582 400

EBITDA margin 6,6% 2,7% 5,2% 6,2% 6,1% 5,7%

Depreciat ion and amorizat ion 2 127 448 - 1 762 033 - 1 552 000 - 2 319 000 - 1 432 522 - 1 298 615 -

Operating profit 3 293 116 503 509 2 680 000 2 719 000 3 684 542 3 283 785

Operat ing profit margin 4,0% 0,6% 3,3% 3,3% 4,4% 4,1%

Net profit 1 591 045 1 174 047 - 1 215 000 766 000 2 564 831 2 322 452

Net profit margin 1,9% -1,4% 1,5% 0,9% 3,1% 2,9%

ROE -5,9% 5,3% 3,4% 11,3% 9,5%

Analyst:

Akos Kuti

Tel: +36-1-268-7940

E-mail: [email protected]

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15 DECEMBER 2017

HISTORY OF THE COMPANY

The company was founded in 1997 by Dávid Tibor and Balázs Ács with their own equity of

HUF 2 million. Due to the dynamic expansion in operation, Masterplast added international

suppliers and sales partners to its distribution network. During 1998 the Company worked

out an agreement with producing partners who used Masterplast raw materials to

produce products specified by Masterplast.

Between 1999 and 2003 the Company established subsidiaries in Slovakia, Romania,

Croatia, Serbia, the Czech Republic and Germany in order to increase its footprint within

the region. In 2004 Masterplast acquired one of its rivals and in 2005 they set up a

representative agency in Ukraine.

In 2005 Masterplast started its own production company in Kál, Hungary which produces

foam underlay and other plaster profiles and accessories. It was followed by an even

bigger capital investment into a factory producing EPS in Szabadka. In 2006 Masterplast

Kft. changed its name to Masterplast Group International and became a private limited

company with equity of HUF 20 million.

Due to the financial crisis during 2007-2008, the company closed several subsidiaries in

countries where its presence was marginal and lacked significant competitive

advantages.


Consolidated companies as of 30 September 2017

Masterplast Romania S.R.L Romania 36 000 RON 100% 100% Wholesale of building materials

Masterplast YU D.o.o Serbia 192 557 060 RSD 100% 100%

Master Plasts d.o.o. Croatia 20 000 HRK 100% 100% Wholesale of building materials

MasterPlast TOV Ukraine 27 000 UAH 80% 80% Wholesale of building materials

Masterplast Sp zoo Poland 200 000 PLN 80,04% 80,04% Wholesale of building materials

Masterfoam Kft. Hungary 3 000 000 HUF 100% 100% Foil manufacturing

Masterplast Kft. Hungary 10 000 000 HUF 100% 100% Wholesale of building materials

Masterplast D.O.O. Macedonia 973 255 MKD 10% 10% Wholesale of building materials

OOO Masterplast RUS Russia 1 000 000 RUB 100% 100% Wholesale of building materials

Green MP Invest UKraine 33 223 500 UAH 100% 100% Property management

Masterplast Hungária Kft. Hungary 230 000 000 HUF 100% 100% Wholesale of building materials

Mastermesh Production Kft. Hungary 300 000 000 HUF 100% 100% Wholesale of building materials

Masterplast International Kft. Hungary 3 000 000 HUF 100% 100% Wholesale of building materials

Indirect relations

Masterplast D.O.O. Macedonia 973 255 MKD 80% 80% Wholesale of building materials

Affiliated company of the Group

Masterprofil Kft Hungary 3 000 000 HUF 20% 20% Profile manufacturing

Activity

Wholesale of building

materials, EPS manufacturing

Comapany

Places of business

registration Equity capital

Foreing

currency Ownership Voting right

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15 DECEMBER 2017

BUSINESS PROFILE

The two main activities of the Group are sales and production of insulation materials and

other building materials.

1. Sales

Masterplast Group follows a business-to-business (B2B) strategy, which means that instead

of selling products to end-users the company provides them through business partners

(brand-dealers, building material traders, DIY shops etc.). In the CEE region the Company

built a network of more than 4000 stable customers.

Domestic sales: sales within the borders of the respective subsidiary’s country (Hungary,

Romania, Serbia, Croatia, Ukraine, Slovakia, Poland, Austria, Macedonia, Russia)

Export sales: sales into a country where Masterplast does not operate a subsidiary.

Main export markets are Estonia, Lithuania, Latvia, Germany, Slovenia, Greece, Turkey

and Italy.

2. Production

a) Self-production

The Company itself produces those products which are considered to be

strategically important;

difficult to ensure in constant quality or quantity;

cheaper to manufacture than purchase.

Masterplast operates three manufacturing factories: one in Hungary, Serbia and Romania.

The factory in Kál, Hungary started to operate in 2005 producing expanded polyethylene

foam sheets for construction and packaging.

Production plant in Kál, Hungary Product of Kál factory - ISOFOAM


The company opened its first ISOMASTER EPS insulation board factory in Subotica, Serbia in

2008. The biggest investment launched by the Serbian unit (Masterplast YU d.o.o.) during

the past years was the MASTERNET fiberglass mesh production facility, which will be

completed by 2018. The products produced in Subotica are made for the dynamically

growing EU market.

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15 DECEMBER 2017

Due to the rising energy prices and tightening environmental regulations the market

demand has increased and that made the capacity expansion reasonable. Due to the

new technologies the company was able to manufacture products with higher and more

stable quality.

The waste percentage and energy usage are much lower than that of an old plant. The

less energy use does not only support a more economical production but also

environmental aspects. In 2017 the company sold solely self-produced fiberglass mesh in

the EU.

Production plant in Subotica,

Serbia

Product of Subotica factory

EPS

Fiberglass mesh


Masterplast’s third factory started its operation in Sepsiszentgyörgy, Romania during 2012.

The plant produces adhesive materials - which is one of the element of the strategically

important thermal insulation system - and EPS. Approximately 30% of the products is

produced by Masterplast, which is planned to be increased to 40% in the upcoming years.

b) Manufacturing under licence

The majority (approximately 70%) of the Company’s products are produced by a second

party, operating in Europe or in the Far-Eastern region. The product features, design,

quality requirements and packaging details are specified by Masterplast.

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15 DECEMBER 2017

KEY PRODUCTS

Masterplast sells wide range of products, thus competes with several companies across

those categories. These are international manufacturing companies, as well as smaller

local enterprises distributing construction materials.

Main product lines (and competitors)

Thermal insulation systems and insulation

materials: a whole system which includes

insulation material, adhesive, plaster, retainers

and other insulation accessories used during

refurbishments and constructions. Due to the

stricter energy-efficiency regulations, demand for

heat-insulation materials is likely to increase in the future

(main competitors: Baumit, Schwenk, Weber, STO and

Knauf).

Roof underlays and roof accessories: the most important

function of roof underlays is the drainage of the humidity

passing through the roof covers and as a secondary

function it also protects the structures and spaces

underneath. In most cases they are used during

constructions, roof refurbishments (main competitors: Juta,

Foliarex, Marma, Dörken and CB).

Bituminous roof covering: corrugated bituminous sheets (Ondulin, Gutta)


Masternet fiberglass mesh


Mastermax underlay for

roofing


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15 DECEMBER 2017

Heat-, sound- and water insulation materials (main competitors: Rockwool, Isover,

Knauf, Austrotherm)

Drywall products (main competitors: Rigips, Lafarge, Knauf)

Plaster profiles and construction accessories

BREAK-DOWN OF SALES

Considering the break-down of sales, more than 60% came from thermal insulation

systems and insulation materials and heat, sound and water insulation materials.


Regarding the geographical breakdown, the biggest proportion of sales comes from

Hungary. It was 30% in 2016, while 15% came both from Romania and the export markets.

Serbian sales made up 11%.

The Serbian construction material market is quite underdeveloped yet, but it is expected

to converge to the EU average, which serves as an opportunity for Masterplast to exploit.

The management foresaw a great performance on the Ukrainian market as well, while the

Polish market is already in a mature phase with numerous strong peers.

ISOMASTER EPS WOODWOOL – thermal insulation


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15 DECEMBER 2017


MAIN MARKETS

Currently the sales of Masterplast products are closely linked to real estate market trends,

especially to new constructions. Following the financial crisis in 2008, the number of new

constructions dropped heavily in all CEE countries, except Poland. Permits for new

constructions in Hungary started to pick up in 2014 and since then it has been increasing

year by year, but the number is still below the pre-crisis level.

Source: Eurostat, Masterplast, MKB

*Estimation for 2017

Source: EUROSTAT, Masterplast, MKB

BUILDING PERMITS - PERCENTAGE CHANGE

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Bulgaria 61,3 21 -23 -59,2 -36,4 -14,5 -3,3 -15,7 29,1 8,9 5,2

Croatia 9,8 -3,1 -0,8 -31,7 -20,8 0,9 -27,2 -21,8 -1,7 -10,8 33,2

Hungary -13,5 -0,2 -0,4 -34,1 -38,6 -32,1 -15,6 27,1 30,6 29,4 157,2

Austria 7,9 -2,4 0,6 -0,3 0,8 18,8 -11,2 13,7 4,1 1,6 5,9

Poland 38,5 47,5 -6,9 -23,6 -2 6,1 -10,7 -16 13,9 21,3 12,3

Romania 17,2 10,9 7,9 -20,1 -13,6 -6,6 -4 -0,2 -0,3 3,8 -1,2

Slovakia 3,1 -9,8 59,6 -30,2 -20,1 -19,5 -0,2 13,5 8,6 23,4 14,6

SALES BROKEN DOWN BY COUNTRIES

2011 2012 2013 2014 2015 2016

Hungary 27% 26% 26% 26% 27% 30%

Export 4% 7% 20% 15% 14% 15%

Romania 26% 23% 11% 11% 15% 15%

Serbia 12% 11% 6% 5% 12% 11%

Ukraine 9% 11% 12% 10% 10% 9%

Croatia 8% 7% 6% 5% 5% 5%

Poland 4% 5% 6% 5% 6% 5%

Slovakia 4% 4% 4% 10% 6% 4%

Other 7% 7% 6% 6% 6% 5%

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15 DECEMBER 2017

From 2011, the average annual sales growth for Masterplast has stagnated, which meant

the company struggled to increase its revenue despite the improving external

environment. However, we saw a generous pick up in the number of new construction

permits issued especially in the core market of Hungary. As products of the Company are

usually needed in the middle and final stage of the building process, this will result in sales

lagging the trend of new construction permits with a 1-2 year on average.

The Company managed to reduce other operating expenses (such as salaries and

administrative costs), and with depreciation also decreasing, operating profit margin

remained stable around 4%. Average net profit margin from 2012 to 2016 was 1.5%, while

average ROE came at 4.7%.

Looking at the balance sheet; the net debt slightly increased from 12.4 million EUR to 14.6

million EUR between 2012 and 2016, while in 2012, shareholder’s equity jumped due to the

SPO. Analyzing leverage ratios we could observe that net debt to equity and capital was

quite stable around 50% and 35% respectively between 2012 and 2016. Net debt to

EBITDA fluctuated around 3.2X. Quick ratio –which measures the short term liquidity

situation of the Company by comparing the level of current assets to current liabilities – is

well above 1X, which shows a healthy liquidity situation. However the quick ratio warns us


CYCLICAL OPERATION

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that inventories – which are less liquid assets – are quite high among current assets, which

could lead to liquidity problems later.

Source: Masterplast, MKB Quick ratio = current assets/current liabilities

Acid test ratio = (current assets – inventory) / current liabilities

Net debt = Total debt – Cash

SHAREHOLDERS’ STRUCTURE

During 2011 Masterplast Group registered its shares for trading on the Budapest Stock

Exchange. In 2012, the Company raised its capital through an SPO where the shares were

sold at HUF 630/share. Although the co-founders hold almost two-third of the total shares

(64,49%), they have maintained their stakes for years.

There was only one sale auction back in 2015, where 400,000 shares were sold at a price

of HUF549 during a public book-building process. Since that the co-founders sold no

stakes.

*as of 30 September 2017


VALUATION

Based on our assumptions sales will grow in 2017, 2018 and 2019 due to the anticipated

positive trends on the real estate markets. In our view, market dynamics would change

after 2020, thus we expect sales to drop between 2020 and 2022.

In 2017 we foresee EBIT margin decreasing slightly to 3.8% from 4.1% in 2016 due to the shift

to lower margin products. We calculated with this 3.8% EBIT-margin on the longer term.

SELECTED BALANCE SHEET FIGURES (EUR) AND LEVERAGE RATIOS

for the year of 2011 2012 2013 2014 2015 2016

Current assets 27 699 308 29 886 897 28 299 779 33 316 512 35 851 353 35 160 535

Intangible assets 20 577 007 22 507 883 24 018 949 20 475 846 21 319 148 24 920 852

Current liabilities 25 132 767 24 296 560 21 999 281 25 568 437 25 284 601 25 701 114

Long-term liabilities 5 937 098 5 259 852 7 374 983 6 595 416 7 999 459 9 509 703

Shareholder's Equity 17 206 450 22 838 368 22 944 464 21 629 135 23 886 441 24 870 570

Net debt 12 354 680 12 281 170 12 737 107 14 463 259 11 116 004 14 645 692

Quick ratio 1,10 1,23 1,29 1,30 1,42 1,37

Acid test ratio 0,57 0,63 0,70 0,59 0,72 0,64

Net debt to Equity 0,72 0,54 0,56 0,67 0,47 0,59

Net debt to Capital 0,42 0,35 0,36 0,40 0,32 0,37

Net debt to EBITDA 2,28 5,42 3,01 2,87 2,17 3,20

Name Share %

Dávid Tibor 34,69

Balázs Ács 29,8

OTP Fund Management 6,66

Free float 28,85

Total 100

Shareholders of the Company with holding over 5%*

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To get net operated profit less adjusted tax (NOPLAT= EBIT *(1-tax rate) we used a 10% tax

rate.

Net CAPEX is the capital expenditures exceeding depreciation and amortization

expenses. In 2018 the Company plans to invest 6.7 million EUR into the Serbian factory

expansion 25% of which is own funding. Starting from 2018 we calculated with net CAPEX

of 750 million EUR which is equal to a retention rate of approximately 30%.

For the terminal value we forecasted a perpetual growth rate of 1%, which is the multiple

of the retention rate and the projected ROE of 3.4%.

The discount rate we used to get the present value of future cash flows is 6%, however, we

assume a slightly higher rate for the terminal value (7%) based on an assumption of a

higher yield environment in the medium term. We presumed that capital structure will

remain stable in the future: 53% of equity and 47% of debt.

The debt level of EUR 23.5 million is the current debt level as of 30 September 2017

increased by the additional 2.7 million EUR loan needed for the Serbian investment.

After deducting debt from FCFF, we get the equity value (FCFE) which - divided by the

number of shares outstanding - leads us to a HUF 720 as the fair value of a share and HUF

775 as the 1-year target price.

RISKS

Main market and company-specific risks are the following

Change in the macroeconomic fundamentals and in the construction market in

Hungary and in the countries of subsidiaries: In the recent years the low interest rate

environment fueled housing and construction market activity globally which was

beneficial for Masterplast. However; an anticipated change in monetary policies in the

region could result in higher interest rates, thus cooling down housing market dynamics,

creating a more difficult environment for Masterplast to operate in.

Financing risk, risk of credit market conditions: change in interest rate environment

could create refinancing risk, pushing cost of debt higher

Foreign exchange risk: the company makes and receives payments in different

currencies thus facing a significant foreign exchange risk. The company applies a quite

flexible foreign exchange policy which if formed according to current FX environment

DCF Model

2014 2015 2016 2017 2018 2019 2020 2021 2022 TV

Sales 81 605 000 83 773 139 80 162 711 84 972 474 89 221 097 91 005 519 89 185 409 84 726 138 80 489 832 81 294 730

Sales growth 3% -4% 6% 5% 2% -2% -5% -5% 1%

EBIT 2 719 000 3 684 542 3 283 785 3 228 954 3 390 402 3 458 210 3 389 046 3 219 593 3 058 614 3 089 200

EBIT margin 3,3% 4,4% 4,1% 3,8% 3,8% 3,8% 3,8% 3,8% 3,8% 3,8%

NOPLAT 2 613 731 3 494 773 2 774 772 2 906 059 3 051 362 3 112 389 3 050 141 2 897 634 2 752 752 2 780 280

Net CAPEX 1 663 338 - 3 063 114 - 5 456 938 - 7 622 667 - 2 425 000 - 750 000 - 750 000 - 750 000 - 750 000 - 750 000 -

WC change 2 252 195 169 798 - 443 111 1 109 412 - 977 183 - 410 417 - 418 625 1 025 632 974 351 185 127 -

FCFF 1 301 802 - 601 457 3 125 277 - 3 607 196 - 1 603 545 2 772 806 1 881 516 1 122 002 1 028 402 37 292 674

Discount factor 1,00 0,94 0,89 0,84 0,79 0,75 0,75

PV of FCFF (EV) 30 973 015

Net Debt 21 073 000

Number of shares outstanding 13 743

Fair value of a share 720

1-year target price 775


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and anticipation of the management, and also by taking into account the FX strategies

of the competitors.

Legal, administrative and political risk: EU-funds for energy-efficiency projects have a

positive impact on demand for Masterplast products. A drop in these kind of subsidies

could result in lower sales.

Taxation risk: the currently effective reduced rate of value added tax imposed on real

estate transactions might be increased from 2020, which could temper real estate

market activity. However, the Serbian unit will receive a 10-year tax holiday beginning

from 2018.

Increasing competition: construction market is not a knowledge-intensive business, thus

there is a low barrier to entry which can easily increase market competition

Credit risk: the company operates with deferred payment conditions, with a 45-50 day

payment terms on average

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DISCLAIMER

1. This research/commentary was prepared by the assignment of Budapest Stock Exchange Ltd. (registered

seat: 1054 Budapest, Szabadság tér 7. Platina torony I. ép. IV. emelet; company registration number: 01-10-

044764, hereinafter: BSE) under the agreement which was concluded by and between BSE and MKB Bank Ltd.

(registered seat: H-1056 Budapest Váci utca 38., company registration number: 01-10-040952, hereinafter:

Investment Service Provider)

2. BSE shall not be liable for the content of this research/commentary, especially for the accuracy and

completeness of the information therein and for the forecasts and conclusions; the Service Provider shall be

solely liable for these. The Service Provider is entitled to all copyrights regarding this research/commentary

however BSE is entitled to use and advertise/spread it but BSE shall not modify its content.

3. This research/commentary shall not be qualified as investment advice specified in Point 9 Section 4 (2) of

Act No. CXXXVIII of 2007 on Investment Firms and Commodity Dealers and on the Regulations Governing their

Activities. Furthermore, this document shall not be qualified as an offer or call to tenders for the purchase, sale

or hold of the financial instrument(s) concerned by the research/commentary.

4. All information used in the publication of this material has been compiled from publicly available sources

that are believed to be reliable; however MKB Bank does not guarantee the accuracy or completeness of this

material. Opinions contained in this report represent those of the research department of MKB Bank at the

time of publication and are subject to change without notice.

5. Past performance is not necessarily a guide to future performance. Forward-looking information or

statements in this report contain information that is based on assumptions, forecasts of future results, estimates

of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other

factors which may cause the actual results, performance or achievements of their subject matter to be

materially different from current expectations. Investors are advised to assess the nature and risks of the

financial instruments and investment services. A well-founded investment decision can be made only in

possession of all the relevant information, therefore investors are hereby explicitly advised to read carefully the

information material, contractual provisions, conditions list and general business terms in order to be able to

decide if the investment is in line with their risk bearing capacity. MKB Bank also recommends collecting

information about the tax consequences and other relevant laws concerning investment services in the

financial instruments mentioned in this document.

6. This document is provided for information purposes only, therefore the information provided in or derived

from it is not intended to be, and should not be construed in any manner whatsoever as personalised advice

or as a solicitation to effect, or attempt to effect, any transaction in a financial instrument (e.g.

recommendation to buy, sell, hold) or as a solicitation to enter into an agreement or to any other commitment

with regards to the financial instrument discussed. Any such offer would be made only after a prospective

participant had completed its independent investigation of the securities, instruments, or transactions and

received all information it required to make its investment decision. MKB Bank excludes any liability for any

investment decision based on this document.

7. MKB Bank is entitled to provide market making, investment services or ancillary services regarding the

financial instruments discussed in this document.

8. Content of this material enjoys copyright protection according to Act LXXVI. of 1999 on copyright, and may

therefore be copied, published, distributed or used in any other form only with prior written consent of MKB

Bank. All rights reserved. Unauthorized use is prohibited.

Documents

MASTERPLAST: INITIATING COVERAGE 15 …...2017/12/15 · 15 DECEMBER 2017 Source: Masterplast, MKB MAIN MARKETS Currently the sales of Masterplast products are closely linked to real